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The Rule of Lawyers

Two recent books examining the interchange between law and economics make clear that the modern world cannot be understood, let alone governed, without a multidisciplinary perspective. Yet insofar as there is an ongoing dialogue between the two fields, it tends to be a one-way conversation.

Law professors are apparently chafing at the confines of traditional law and economics, an academic subfield that emerged when intermediate-level microeconomics was imported wholesale into law. Proponents of law and economics largely succeeded in displacing previous, ethics-based modes of jurisprudence and establishing economic efficiency as a key criterion for settling legal disputes.

But Katharina Pistor of Columbia Law School turns that change on its head. In The Code of Capital, she builds on her seminal 2013 paper, “A Legal Theory of Finance,” which argued that it is finance that should be importing principles from the law. Now, she is extending that contention to economics generally.

In Law and Macroeconomics, Yair Listokin of Yale Law School takes a more conventional approach, arguing that law should import not just microeconomics, but macroeconomics as well. The result, he submits, would be to supplement traditional monetary and fiscal policy with what he calls “expansionary legal policy.”

In both cases, the authors frame their arguments as an intellectual response to the 2007-09 global financial crisis. And both hark back to the Great Depression and its aftermath, when US President Franklin D. Roosevelt’s administration was staffed to the brim with lawyers and economists who worked together to rebuild an economy in shambles.


The fact that lawyers run the world is not news. Exactly how they do it, though, is less well-known. For this economist, reading Pistor’s claim that the “legal code of capital … has taken over the space that was once occupied by the invisible hand” makes me wonder if I picked the wrong profession 40 years ago. I can remember my younger self observing that economic arguments operate as a kind of trump card in policy debates, easily beating mere ethical claims. It was this realization that motivated me to master the language of economics.

The Code of Capital
But now comes Pistor, telling me that the “masters of the code” have their own trump cards: legal provisions that are enforced by courts against all comers, making them impervious by design to all counterarguments. Moreover, using such legal “modules,” lawyers have built a veritable “empire of law” stretching across the entire globe, one that follows a logic and evolutionary dynamic that can be understood only by those who have mastered the code. (Apparently, I am out of luck.)

This is the kind of imperial claim I am used to hearing from my more enthusiastic economist colleagues, those who are most eager to colonize other social sciences. Pistor, however, is writing not as an enthusiast, but as a critic. A master of the code herself, she wants to show non-masters like me exactly how her fellow lawyers created a world of both tremendous wealth and destabilizing levels of inequality.

Pistor’s primary goal is to convince us that it all might have turned out differently if only the masters of the code had directed their efforts otherwise. We are given to believe that it all might still turn out differently in some possible future. “The law is a powerful tool for social ordering and, if used wisely, has the potential to serve a broad range of social objectives,” Pistor writes, “yet … the law has been placed firmly in the service of capital.”

Through extensive case studies, Pistor demonstrates that no one deliberately set out to construct the “empire of law.” Rather, it is the result of a decentralized, unplanned process in which individual private lawyers helped individual clients protect their assets through the use of preexisting legal constructs: contract, property, and collateral law; trust, corporate, and bankruptcy law. By transforming mere assets – successively land, firms, debt, and know-how – into capital, these lawyers endowed them with the crucial properties of priority and universality, durability, and convertibility.

Of course, this spontaneous project worked only because the state, operating mainly through the courts, was willing to use its coercive power to enforce each successive legal module. The empire was built with private law on a public foundation. Specifically, it was wrought from English common law and the laws of New York State, and enforced by British and New York courts, respectively. It grew bit by bit as these two bodies of law were exported worldwide by masters of the code whose clients were operating under foreign law. Other governments allowed this because, though they had their own legal systems, they saw standardization as a means of enhancing national wealth. In hindsight, we can now see that it was always about enhancing private wealth, by securing assets from any possible state claim, such as taxation.

One result of this centuries-long process has been rising inequality between the clientele of the masters of the code and everyone else. Another has been the hollowing out of the authority of states. The irony is that both of these tendencies are now threatening to undermine the stability of the private empire of law itself, because its survival ultimately depends on state enforcement. At some point, weak states lacking political legitimacy may simply decide that they will no longer backstop the applicable legal claims. On this point, the 2008 financial crisis was arguably a wake-up call.

As for Pistor, she calls for both a full rollback of the empire of law and a deliberate shift by future masters of the code (her students) toward a new clientele. “For democracy to prevail in capitalist systems,” she contends, “polities must regain control over law, the only tool they have to govern themselves, and this must include the modules of the code of capital.” Instead of serving capital, masters of the code would be better occupied helping to “advance the project of democratic self-governance.”

Bearing in mind the broad contours of Pistor’s argument, this economist turned to The Code of Capital’s chapter on “Minting Debt” with great expectation, not least because it includes citations to my own work on the topic. Here, Pistor’s central claim is that the masters of the code work hard to give capital assets the appearance – if not the substance – of convertibility into state money, the latter being “the only financial asset that is guaranteed to keep its nominal value.” Hence, she recommends that states “keep the inflation of private money under control, because the more they bend to the will of private debt minters in boom times, the more they will be on the hook when it turns out that the economy cannot sustain the debt burden they created.”

By “on the hook,” Pistor is apparently referring to central banks’ role as lender of last resort, though I did not find any instance of her making this point explicitly. The closest she comes to mentioning the lender-of-last-resort function is in a short passage two chapters later. “Big banks,” she points out, have “something no other financial intermediaries do: a lifeline to their central bank in the form of liquidity backstopping (through reserves and access to the discount window), and in the worst-case scenario, perhaps even bailouts.”

Public backstopping of private money is obviously crucial for halting both systemic financial crises and smaller crises affecting single entities. But, more to the point, this function of central banks has nothing to do with the masters of the code or the courts that adjudicate whether new modules of code are to be accepted or struck down. Masters of the code can write whatever they want, but at the discount window – or in the case of any of the other emergency liquidity facilities the Fed used during the last financial crisis – it is the Fed that decides who gets backstopped. And as we have seen, such decisions can be made over a weekend, when courts are not in session.

Given these financial realities, the fact that the empire of law runs on English common law and New York State law cries out for additional attention. Surely this historical contingency has something to do with the fact that the British pound was long a world currency, as is the US dollar today. That means the Bank of England was long the world’s de facto lender of last resort, just as the Fed is now. This institutional arrangement, like so many others Pistor mentions, may well have arisen from the decentralized process of individual lawyers helping individual clients, who for reasons of their own decided to invoice their international transactions in the world currency of the time. But whatever those reasons were, they were more about economics than law.

After all, in a global economy, convertibility means that an asset can be liquidated into world money, not just domestic state money. Masters of the code can write whatever they want. But it is the issuer of the world currency, not the courts, that decides who gets access to the discount window and who does not. Acknowledging this, Pistor might see another opportunity to advance the project of democratic self-governance. But the larger point is that there are other forces to consider beyond the masters of the code.


Pistor writes as a lawyer, drawing attention to how the law structures our social system. Her book is a lot to take in for this mere economist, but it is very much worth the effort. By contrast, Listokin is both a law professor and a PhD economist, but writes more like the latter. Lawyers and future politicians seem to be the intended audience of Law and Macroeconomics. He wants to teach them standard macroeconomics, the central lessons of which he takes to be the importance of aggregate demand for driving aggregate employment, and the crucial role of macroeconomic policy in stabilizing aggregate demand.

Law and Macroeconomics
Like any good teacher, Listokin has his students’ own interests in mind. For lawyers who might someday serve as regulators or public administrators, he shows how various institutional features of the economy operate as automatic stabilizers or destabilizers. From a macroeconomic perspective, he wants students to know not just that stabilizers are good (and destabilizers bad), but that these features should be considered in the policymaking process, particularly when it comes to “institutional design.”

Listokin’s main example of an automatic destabilizer is the state and local tax (SALT) deduction, which used to result in the US federal government providing a larger subsidy for state spending during cyclical upswings, and a smaller deduction during downswings. That, he notes, is not how someone designing the system from scratch would have arranged things. The SALT deduction was capped by the 2017 Tax Cut and Jobs Act. But, unfortunately, that legislation added even bigger automatic destabilizers in Medicaid, Federal Housing Administration insurance, and many other areas that merit attention.

While the first part of Listokin’s book is addressed to lawyers and policymakers, the second part seems directed more toward economists, though less successfully. He wants economists to embrace law as an explicit tool of macroeconomic stabilization. Here, his big example is the Keystone XL Pipeline. After being blocked by regulatory concerns during the Great Recession despite the need for fiscal expansion, the project was finally approved by the Trump administration at the peak of an economic boom. As with the SALT deduction, exactly the opposite sequencing would have been preferable.

Much of Listokin’s book is concerned with the increasingly limited scope of traditional macroeconomic-policy tools – owing, specifically, to the zero-lower-bound constraint on monetary policy and the debt-limit constraint on fiscal policy. Given these limitations, one could imagine other potential opportunities for “expansionary legal policy,” as Listokin himself does. But whether any of these would be effective enough to spend much time on is unclear.

To be sure, one could make a case for countercyclical legal policy quite generally. Governments could consider caps on utility rates, various forms of bankruptcy and loan forgiveness, or even court judgments for monetary damage. For his part, Listokin proposes a new Office of Fiscal and Regulatory Affairs to identify, monitor, and coordinate the macroeconomic impact of existing and future regulatory mechanisms.

But would any of this make much difference? An economist would point out that the effects of such measures are all second-order in nature. In fact, even Listokin, true to his training, expresses doubts. “Even if the reader doesn’t think expansionary legal policy is worth the candle,” he writes, “I at least hope that law and macroeconomics offers a different and fruitful perspective on law, monetary policy, and fiscal policy.”

As for myself, I see Law and Macroeconomics mainly as a symptom of dissatisfaction with the old law and economics. Listokin is exploring the potential for a new kind of conversation between the two fields. If his book helps to realize that goal, I would say job well done. At the moment, the project seems to run in only one direction, importing economics into law. But perhaps that is just the first step toward what both he and Pistor suggest would be a more mutually beneficial exchange of ideas.

(Katharina Pistor, The Code of Capital: How the Law Creates Wealth and Inequality, Princeton University Press, 2019. Yair Listokin, Law and Macroeconomics: Legal Remedies to Recessions, Harvard University Press, 2019.)

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